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Cash out refinancing is an alternative to taking out
a second mortgage home equity loan. A cash out refinanancing
is like buying your house from yourself for a higher price
than your current mortgage balance. The money from this
transaction is used to pay off the original mortgage,
and the difference is given to you.
This type of home equity loan is not suitable for everyone.
Saving money is the purpose of the cash out refinance.
An up front closing cost is required before the loan is
given so you should be able to recoup this amount in an
exceptable time frame.
Cash out refinancing is not a good option for you if
you do not lower your monthly payments. People with interest
rates that are equal or lower than the current standard
rates should not use this method. Refinancing into a loan
with a higher interest rate causes monthly payments to
be higher, and you will lose money in the long run.
If a pre-payment penalty clause exists in the mortgage
contract you should not consider a cash out refinance
as an option. When a home is refinanced, the existing
mortgage will be paid in full. A pre-payment penalty clause
will require that you pay an additional fee of a certain
percentage to your current mortgage lender.
(click
to learn more about pre-payment penalty provision)
It is not a good idea to refinance for the full amount
of your home's appraised value. You should always have
a cushion in the event that you need to sell your home.
Though it is unlikely that a home's appraised value will
decrease, it is possible. Therefore, a good rule
of thumb is to not refinance for more than 8 percent of
the home's appraised value.
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